While expectations of a range bound
market in the absence of any significant short term trigger did hold true for
the first four days of the week, the last day was an exception with the index
registering a substantial 1.6% increase to round off the week at 9,226.41, 1.79%
higher WoW. Increase in international oil prices on Thursday and renewed round
of accumulation in PTCL by punters were cited as the major reasons driving the
rally. The much talked about issue between SECP and KSE over nomination of a
non-broker Chairman of the exchange reflected in the index only on an intra-day
basis, taking it below the 9,000 mark during the day but closing above 9,000
throughout the week.

OUTLOOK FOR THE FUTURE

The market will again be 'looking' for
triggers in the forthcoming week. The SECP-KSE issue is a potential sentiment
driver in the next week with none of parties thus far willing to take a backward
step. The dormant issue of PTCL could raise its head with some newspaper reports
suggesting that the issue might have touched its boiling point and something
will give in the next few days. Any positive (or negative) development over the
issue of Kalabagh dam, could also be a key trigger/ dampener for the cement
sector during the next week. Irrespective of these issues, the market remains in
an uncertain state with market participants unsure of a direction. Sticking to
stocks backed by strong fundamentals remains our preferred route in the market.
We recommend investors to go long in Pakistan Oilfields, Fauji Fertilizer Bin
Qasim, Nishat Mills, ICI Pakistan and Azgard Nine. From a dividend yield
perspective, KAPCO looks attractive.

FUNDAMENTAL CHANGES

The major developments this week were:

•The Oil Companies Advisory Committee
(OCAC) has maintained domestic oil prices for another fortnight in the review
conducted on Wednesday.

•Another round of technical and
political discussions for construction of dams in Pakistan was undertaken.

•Karachi Electric Supply Corporation
was handed over to the new owners, consortium of Hasan Associates and Aljomaih
Group.

•Privatization Minister Hafeez Sheikh
has reiterated that the talks are in final stage and a result should be
forthcoming in the next few days.

•Central Board of Revenue (CBR)
revenue collection fell short of PRs48.8bn target by 12% coming in at PRs42.9bn
in Nov-05.

•The government has asked existing
Independent Power Producers (IPPs) to increase their installed generation
capacity. The government is looking for an increase of 1,300-1,400MW in the
installed capacity of existing IPPs to cover the deficit in electricity
generation capacity, expected to hit the country in 2007-08.

•Pakistan's textile exports to the EU
have dropped by 16.3% since the inception of free trade under the WTO. We do not
find this situation overly alarming. A number of factors have contributed to
this, particularly the 40% swell of Chinese exports to the region and the price
decline of textile products on the back of competition and 2004-05 cheap cotton
crop. With Chinese export growth to the EU capped at between 8.5% and 12% since
Jul-05 and somewhat firmer cotton prices in play, we expect the situation to
rectify.

•Mobile Number Portability (MNP) is
proposed for implementation by April 2006. Under the MNP facility, cellular
subscribers can switch service providers while retaining their original number.

•The import of old and used vehicles
under the Gift Scheme, Transfer of Residence Scheme and Personal Baggage Scheme
has gained momentum and a phenomenal growth of 369% (YoY) was witnessed in the
first four months July-October.

THIS WEEK'S TOP STORIES

UREA OFFTAKE - OUTPACED EXPECTATIONS

Heading towards the year-end,
fertilizer industry is indicating buoyant growth in urea as well as DAP offtake
where the industry has reported 17% YoY growth in urea and 15% YoY growth in DAP
offtake during Jan'05- Oct'05. This incremental growth (met through imports) in
urea offtake at this juncture of time does not have a major impact on existing
fertilizer companies, however this carries a positive message for a company
eyeing a million ton supply demand deficit by 2010-2011, making the outlook for
setting up a new plant expansion more attractive. We do not expect any further
revision in urea prices during the remaining part of 2005 whereas we expect
up-cycle in DAP prices to continue. We maintain our liking for FFBL (for 26%
upside to our Target Price of PRs47.90) and Engro (for positive outlook on a new
urea plant).

EXTERNAL DEBT TO GDP- DECLINING!

The stock of External Debt and
Liabilities (EDL) witnessed a marginal decline in the first quarter of current
fiscal year. We believe the decline in external debt is primarily attributed to
the revaluation, as US$ appreciated 2.34% against Japanese Yen and 0.61% against
Euro (in year to Sept 30th). Pakistan's major external debts are denominated in
Euro, Japanese Yen and US Dollar. As per State Bank of Pakistan (SBP),
Pakistan's total External debt and Liabilities were recorded at US$35.67bn as of
1QFY06 (from US$35.83bn on Jun-05). With the decline in external debts, we
believe that the share of expensive debt is also declining and the maturity
profile of outstanding debt has also improved as Pakistan has received long-term
loans, on concessional terms. We expect external debt to increase in 2HFY06 as
international multilateral organizations have pledged over US$3.9bn for
reconstruction and rehabilitation for those affected by earthquake in Azad
Kashmir and NWFP. However, with the improvement in nominal GDP, we expect
Pakistan's external debt to GDP to decline to 31% in FY05 (from 32.7% in FY05).

BED LINEN MAKES A CASE: BUY NML

Details of Pakistan's bed linen exports
to the US since January this year serve to reinforce our bullish view on Nishat
Mills Ltd. Nine months numbers reveal that exports in this category are on an
upward trajectory, having grown by 81% in value since the start of the year.
Somewhat surprising for a bit player, Pakistan's exports in this segment far
outpace those of key competitors, India and China. In the past, the EU's anti
dumping duty on Pakistani bed linen effectively corked export growth in that
direction. Now with a 320bp reduction in that duty (490bp for NML), an
incremental growth avenue has opened up.

Bed linen is something Nishat Mills
does well, really well. With 35% of sales coming in through bed wear; a strong
presence in the growing US market and a 730bp reduction in duty on EU bound bed
wear come January, will serve the company well. We reiterate Buy for NML at our
SOP based price Objective of PRs141.70/ share).

POL- EARNINGS REVISED DOWN; VALUATION
INTACT

We are revising our earnings forecast
for Pakistan Oilfields Limited by PRs2.6 (from PRs47.9 to PRs45.3, 6% downward
revision) for FY06 in light of our recent meeting with the management. The
revision came as a result of (1) fine tuning of production numbers to reflect
expected delay in commencement of production and (2) 20% upward revision in
exploration cost estimates. We estimate around 1,800bopd and 3-4MMCFD of oil and
gas production would be delayed by 2-3 months. We are also revising POL price
objective (PO) by a marginal PRs1.7 to PRs472. As we have already assumed lower
oil prices, recent weakening in international oil prices has not affected our
earnings estimates or PO. With a potential 22% upside at current levels (price
appreciation plus 3.7% dividend yield), we continue to recommend a BUY on POL.

DEVELOPMENT SPENDING FUELS BUDGET
DEFICIT!

Budget deficit in 1QFY06 stood at 0.5%
of GDP (compared to 0.4% in 1QFY05). Higher deficit is primarily driven by
development expenditure (PSDP), recorded at PRs50.58bn (PRs32bn in 1QFY05). We
believe the budget deficit will widen in 2QFY06 as government is expected to
provide funds to earthquake victims. So far, GoP has announced PRs80bn for
relief and reconstruction. With US$6.1bn in international aid committed, we rule
out the reallocation of PSDP expenditure from development projects to
reconstruction and rehabilitation. We expect the government to continue its
ongoing mega development projects and poverty reduction plans. In concurrence
with Merrill Lynch's strategy note on Pakistan, we highlight the power sector,
transport and communication, water system and rural infrastructure as key areas
for spending. Revenue collection (PRs236.57bn) met 1QYF06 target and current
expenditure (PRs219.8bn) was managed within the budget. We expect budget deficit
to widen marginally to 4.0-4.2% in FY06 as against the full year target of 3.8%.